Coty (Ba2 Pos, BB+ Pos, BB+ Pos); Follow up; € 26/28's 3-10bps tighter

Headline revenue beat by ~$50m to come in at $1.73b. By region Asia was only miss (still LFL +16%) and EMEA was strongest surprise with LFL +10% (c+7.7%) coming in with Americas at +11%. It left rev’s this Qtr. more skewed to EMEA (48% vs. Americas 40%).

By sector Beauty missed while prestige (~65% of rev’s this qtr & faster growing business) drove the beat (strong performance from prestige fragrances). Gross margins were 40bps weaker than c at 65.1% - management did tout improvement in margins - which is true vs. prior qtr., but they are down vs. 2Q23 & vs. consensus. Adjusted EBITDA posting a ~$8mil beat at $366m.

E-commerce strength re-iterated at +20% rev growth (not much surprise here given retail trends of recent)- but included a 1.8% lift in penetration yoy to low 20% a positive for the retailer.

Re. Coty's partnership with Burberry {BURBY US Equity} (Single £300m 25's rated Baa2 Pos) for which it has long-term rights for the Beauty fragrances & cosmetics was a strong tailwind for the prestige business. That's in stark to Burberry's own performance - it cut guidance earlier this month (adj. operating profit of FY ending March to £410-460m vs. previous £552-£668) - it shares are down ~20% since Nov (large EPS revisions recently) while Coty's up +30%.

Net Debt was $3.3b down from $3.9b in Q1. It brought net debt/EBITDA down from 3.8* to 3.1* - well down from mid 4’s in late 2023. Moody's post-Q1 results in Nov saw adj. 12m trailing leverage at 5.1* and was expecting leverage to fall to ~4* over next 12-months.

Guidance was unch - its looking for EBITDA margin expansion of 10-30bps (c+38bps) & FY24 EBITDA of $1.08-$1.09b (c$1.09b). Its targeting leverage of 2.5* (3.1* reported this qtr) by end of CY24 & 2* by end of CY25. Divesture of the Wella stake (~$1.08b) is a driver of that deleveraging & its targeting that sale by end of CY25.

Coty €26/28's are 3-10bps tighter on mid's this morning after reversing wider earlier this year, the 5.75% 28's at G+209 still offers value in a uplift into IG which still seems on track. For yield investors the 26's may look more attractive (€ rates 2s4s is -33bps) at 4.1%/€99.5.